For Oil Traders, Price Volatility Makes Individual Due Diligence Critical
Ellen R. Wald, Ph.D | Apr 18, 2019 03:31AM ET
How much weight should oil traders give price forecasts from Wall street analysts, given that they can significantly influence traders' decisions with estimates that frequently don't pan out? All it took was one forecaster, in this case Brent briefly hit $80 per barrel in May 2018 and again in September. However, those highs proved temporary. By October, the price of oil was falling again, and it hit $50 per barrel in December. As these types of forecasts make headlines, it is important for traders to remember that analysts revise their forecasts constantly and are often incorrect in their assumptions.
Hedge funds are already preparing to take advantage of what may be a wild summer for oil prices. Pierre Andurand, whose hedge fund lost over 20% of its value last year when it went long while the price dropped precipitously, is starting a new fund. Called the Andurand Commodities Discretionary Fund, it is supposed to be able to take advantage of these forecasted highs.
According to a report in the Andy Hall , the real accomplishment for many fund managers seems to be getting people to invest in their funds, not their own prowess at investing.
In RBC’s January 2019 forecast , analysts predicted average 2019 prices of $60 and $68 per barrel for WTI and Brent, respectively. Now, only three and half months into the year, they have increased their forecasts to $67 and $75 per barrel for WTI and Brent, respectively. These are increases of 11.7% and 10.3%. In another three and a half months, these forecasts could be dramatically different.
For example, the OPEC/Non-OPEC production cut deal could essentially fall apart when producers meet again at the end of June, which would send prices down. There are growing indications from Russia that it wants to end the deal, and traders must keep in mind that Russia hasn’t yet begun to comply with December’s production cut agreement. Russia is crucial to the extension of any production cut deal, and it may, at minimum, push to increase production. That would also lower prices. We could see those countries with spare capacity ramping up production in the summer and sending prices down in H2. Prices could also drop if the United States decides not to intensify and enforce sanctions against Iran.
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On the demand side of the equation, recent data on trucking in the United States reveals a decline in freight rates and hauling. Trucking in the U.S. accounts for about 70% of its total shipping tonnage, so it is a good indicator of economic activity. To be clear, the U.S. economy is currently healthy, but the declines are an example of one indicator for slower economic growth that could impact fuel demand. Likewise, any downturn in China’s economy could present a negative for oil prices.
Every trader and market watcher must digest a variety of sources of information and determine his or her own forecasts. Wall Street analysts do not have crystal balls or special powers.
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